Back in December 2022, gig workers were given a reprieve. However, many weren't paying attention or aware of the sudden, pending tax reporting responsibility that was about to be dropped on them. Fortunately, due to a number of complaints and the fact that the new reporting rule didn't seem to be ready for primetime, the U.S. Internal Revenue Service (IRS) put a hold on the application. The hold was to last for one year. It's now September, and the hold is getting close to come to an end. When that happens, absent any change or revision, the $600 Rule is going to kick again. And that affects everyone who brings in extra income through platforms like Venmo, PayPal, Swift and others. 

What Exactly is the $600 Rule?

A bit of history here. Back when George W. Bush was president, he signed the Housing and Economic Recovery Act. However, buried in that sizable piece of legislation, was a chapter-full of amendments to the tax code as well. In a nutshell, those changes included what is now known today as the 1099-K tax reporting requirement. For those who aren't familiar, the 1099 Forms are a portfolio of different forms issued by the IRS to process and provide tax reporting back to the federal government. These reports are in turn used to check and confirm income earned as well as the appropriate taxes paid on related income. For freelancers, gig workers and similar income earners paid on contract and through credit card electronic payment tools like PayPal and Venmo or card processors, the addition of the 1099-K was the means to constrain their income in the federal tax world and make sure such payments were not obscured, hidden or omitted from tax reporting.

The change had a wide reach beyond just payment tool payments. It also affected everyone who sold product as well, especially through platforms like eBay, Etsy, Canva and more. Essentially, anyone who was receiving electronic payments as a business, individual or company, was now caught up in the form dragnet that applied with the HERA Act signed by President Bush.

However, the original requirement wasn't as deep-reaching as first thought. It only kicked in when a recipient on a given payment platform earned more than $20,000 annually or had more than 200 transactions from the same paying party. This created an odd gap.

Generally, anyone who received an income payment as a contractor had to receive a 1099-MISC form from the payor. So, if as a business you hired a painter to redo your apartment building and the job was more than $600, then you had to provide him or her a 1099-MISC. The same rule caught up every other miscellaneous payment transaction that wasn't already involved in some other 1099 reporting as well. It didn't apply to workers on a payroll; that was caught up in regular paycheck withholding requirements instead. Despite all the above though, there was loophole created by the 1099-K establishment.

Essentially, if a party paid a contractor or provider with a credit card processor, no 1099-MISC was needed after the HERA Act. The thinking was that the processor's reporting of electronic transactions would capture the errant reporting. That said, again, it only picked up payments that met the two rules mentioned above: $20,000 paid annually by the processor or more than 200 related transactions. 

Of course, the gap wasn't going to last forever. Additional tax changes added new reporting requirements to make sure anything, even electronic payments above $600 in a year, ended up being reported to the IRS. That new, latest change was supposed to kick in and be applied starting the beginning of 2023. Ergo, the $600 Rule of 2023.

A Temporary Delay Only

A large amount of clamor caught the IRS' attention in December 2022, enough at least to make the agency rethink the quick application of the $600 Rule. In a spark of governmental clarity, the tax agency decided that an additional year to get ready was a smart idea, especially given how much electronic payments had become part of daily life versus 2008 and HERA Act changes. That said, the hold on the Rule application was only expected to be temporary at best. And December 31, 2023, is coming quickly.

As it applies, anyone receiving more than $600 electronically is going to receive a 1099-K form, just like those who met the original two reporting criteria ($20,000/200 transactions). Again, this change, in tax concept, closes the gap and increases the government's ability to "see" all income being earned, as well as being taxable. 

The Impact to You, Me & Everyone Else Now (at least in the U.S.)

If the full establishment of the $600 Rule sets in, then essentially anyone who is paid $600 or more from a single payor in a tax year will receive a 1099-K form, and so will the IRS for the same. That includes selling items on auction sites, craft and services on Canva or Etsy, writing gigs, coding and developing freelancing, and the list goes on. The purpose, again, is for the IRS to "see" all income paid. The taxpayer then has the responsibility to report that income on his or her income taxes or have an explanation why it is not income. There is no gatekeeper or test to pass; instead, if a taxpayer is audited and the reporting doesn't match income taxes filed, the taxpayer will be a tub of hot water, so to speak. 

So, if you're a gig worker of any type or someone making a nice side income selling online, it's time to prepare for increased reporting on what you're doing. Get your house in order and adapt. If you're not sure, talk to a CPA Accountant now before 2024 starts and your transactions start kicking in. You don't want to be behind the curve when it comes time to report your taxable income.

Resources:

https://www.irs.gov/forms-pubs/about-form-1099-k

https://www.irs.gov/pub/irs-drop/n-2023-10.pdf

https://www.irs.gov/newsroom/form-1099-k-frequently-asked-questions-individuals

https://www.irs.gov/newsroom/what-taxpayers-should-do-when-they-receive-form-1099-k